Gupta v. Sec. & Exch. Comm'n, 11 Civ. 1900(JSR).

• Citation: 796 F.Supp.2d 503
• Decision Date: 11 July 2011
• Docket Number: No. 11 Civ. 1900(JSR).,11 Civ. 1900(JSR).
• Parties: Rajat K. GUPTA, Plaintiff, v. SECURITIES AND EXCHANGE COMMISSION, Defendant.
• Court: U.S. District Court — Southern District of New York

796 F.Supp.2d 503

Rajat K. GUPTA, Plaintiff,

v.SECURITIES AND EXCHANGE COMMISSION, Defendant.

No. 11 Civ. 1900(JSR).

United States District Court, S.D. New York.

July 11, 2011.

Alan Roy Friedman, David Stanley Frankel, Gary P. Naftalis, Michael Stewart Oberman, Michael J. Sternhell, Robin Marie Wilcox, Kramer Levin Naftalis & Frankel, LLP, New York, NY, for Plaintiff.

Christopher Mark Bruckmann, Richard M. Humes, Office of the General Counsel, Securities and Exchange Commission, Washington, DC, for Defendant.

OPINION AND ORDER

JED S. RAKOFF, District Judge.

A funny thing happened on the way to this forum. On March 1, 2011, the Securities and Exchange Commission (the “SEC” or “Commission”)—having previously filed all of its Galleon-related insider trading actions in this federal district—decided it preferred its home turf. It therefore issued an internal Order Instituting Public Administrative and Cease–and–Desist Proceedings (the “OIP”) against Rajat K. Gupta. The OIP alleged that Gupta, a former board member of both the Goldman Sachs Group, Inc. (“Goldman Sachs”) and the Procter & Gamble Company (“Procter & Gamble”), had in 2008–09 knowingly disclosed material, nonpublic information about these companies to Raj Rajaratnam, the (now-convicted) principal of Galleon Management, LP (“Galleon”), who then traded on the basis of Gupta's inside information. See OIP ¶¶ 1–2. In language substantially similar to its complaints filed in this Court against some 28 other persons and entities accused of Galleon-related insider trading, the SEC alleged that by virtue of such conduct, Gupta willfully violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 (the “Exchange Act”), including SEC Rule 10b–5 promulgated thereunder. Id. ¶ 5, On that basis, the SEC sought civil penalties, disgorgement, and various forms of injunctive relief, id. at p. 9, once again similar to the remedies it sought in this Court against the 28 other Galleon-related defendants.

In response to this seeming exercise in forum-shopping, Gupta promptly filed in this Court a Complaint for Declaratory and Injunctive Relief (“Complaint”) against the SEC. The Complaint alleges that the SEC's unjustified decision to deprive Gupta, alone, of the opportunity to contest these allegations in federal court singles him out for uniquely unfavorable treatment in violation of the Equal Protection Clause of the Constitution. See, e.g., Complaint ¶¶ 14, 16, 25. It further alleges that the SEC, in seeking penalties that, although previously available in federal court, only became available in an administrative action following the July 21, 2010 passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub. Law 111–203, 124 Stat. 1376 (the “Dodd–Frank Act”), is attempting to retroactively apply the provisions of the Dodd–Frank Act to conduct the OIP alleges occurred in 2008 and 2009, and thereby deprive Gupta of the procedural safeguards afforded defendants in federal court, including the constitutional right to a jury trial. See Complaint ¶¶ 1–2, 5–6.

On April 1, 2011, the SEC moved to dismiss the Complaint on various grounds, of which the principal ones are (1) that no statutory basis exists for the Court's assertion of jurisdiction; (2) that Gupta's claims against the SEC are barred by the doctrine of sovereign immunity; (3) that the doctrines of exhaustion and ripeness bar Gupta's claims; and (4) that Section 25(a)(1) of the Exchange Act, 15 U.S.C. § 78y(a)(1), when read together with section 703 of the Administrative Procedure Act (“APA”), grants to the courts of appeal exclusive jurisdiction to review orders entered in SEC administrative proceedings. Following full briefing and oral argument, and after careful consideration, the Court hereby denies the motion to dismiss, but concludes that the Complaint must be limited to the equal protection claim and that the case must proceed on an expedited basis.

By way of background, the SEC, in the year-and-a-half prior to filing the OIP, brought in this Court a series of related actions charging 21 individuals and 7 companies with Galleon-related insider trading. See SEC v. Galleon Management, LP et al., 09 Civ. 8811, filed October 16, 2009; SEC v. Hardin, 10 Civ. 8600, filed November 12, 2010; SEC v. Feinblatt et al., 11 Civ. 170, filed January 10, 2011; and SEC v. Smith, 11 Civ. 535, filed January 26, 2011. The OIP is not materially different from the complaints in the foregoing actions, except that (a) it includes allegations relating to Mr. Gupta, and (b) it seeks to have the Commission impose on Gupta the enhanced administrative penalties authorized by the Dodd–Frank Act.

It appears undisputed that, prior to the enactment of the Dodd–Frank Act on July 21, 2010, the SEC had no power to impose such penalties in an administrative action against a non-regulated person like Gupta. Accordingly, since the conduct here complained of occurred in 2008–09, the OIP in effect seeks to apply Dodd–Frank retroactively, in seeming violation of the well-established rule that a statute will be presumed not to impose penalties retroactively unless it expressly so states. See, e.g., Landgraf v. USI Film Prods., 511 U.S. 244, 114 S.Ct. 1483, 128 L.Ed.2d 229 (1994).

Of course, an impermissible attempt to apply Dodd–Frank retroactively—even if initially commenced in the favorable forum of the SEC where the same Commission that approved the OIP would have to approve any final agency action imposing such penalties—is ultimately subject to review by a federal appellate court. But, according to the Complaint, the Commission's cavalier approach in approving an OIP seeking to apply Dodd–Frank retroactively against Gupta is simply one of several indications that the SEC has chosen to treat Gupta differently from all other Galleon-related defendants, in violation of his constitutional right of equal protection. Thus, for example, the Complaint alleges that, even before filing the OIP, the SEC deprived Gupta of administrative protections owed to him, such as by failing to inform him that the SEC would be seeking an OIP, by failing to have the Commission genuinely consider his “Wells submission” setting forth his defense, and by arranging for the allegations of the OIP to be made prematurely and prejudicially available to the prosecution in the Rajaratnam criminal case. ¹ Complaint ¶¶ 2, 20–21.

According to the Complaint, the SEC's intent in taking these and other extraordinary steps was to selectively prejudice Mr. Gupta—the last of the Galleon-related defendants to be charged by the SEC and the one who most vigorously asserted his innocence. Ultimately, the Complaint alleges, the SEC's plan is to gain an unfair advantage by depriving Gupta of the protections he would have had if the case were brought in federal court, including full discovery, application of the federal rules of evidence, the ability to assert third-party claims for indemnification and contribution, the ability to bring counterclaims against the SEC, and, most importantly, a right to a jury trial: all of which rights are being accorded to every other Galleon-related defendant except Gupta. According to the Complaint: “Against the history of [these other] Galleon-related actions for civil penalties already brought in this Court, there is no benign and non-discriminatory explanation for the Commission's applying Dodd–Frank retroactively against Mr. Gupta, or more generally for filing the action against him administratively, rather than in federal court, as it has invariably done with similarly situated defendants. To the contrary, the only plausible inference is that the Commission is proceeding how and where it is against Mr. Gupta for the bad faith purpose of shoring up a meritless case by disarming its adversary.” Complaint ¶ 16.

For purposes of this motion only, the SEC accepts as true the well-pleaded allegations of the Complaint. Nonetheless, the SEC moves to dismiss on several grounds.

First, the SEC argues that the Court lacks a statutory basis to assert jurisdiction over the case. See Memorandum of Law in Support of Motion to Dismiss Complaint (“SEC Mem.”) at 6–7. Actually, however, since Gupta has alleged constitutional violations, the Court has jurisdiction pursuant to 28 U.S.C. § 1331, which grants district courts “original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.” The Complaint also alleges, on its face, the prerequisites for jurisdiction under the Declaratory Judgment Act, 28 U.S.C. § 2201. To be sure, Congress may choose to limit a district court's jurisdiction over the actions of a federal administrative agency. But in the absence of some other statute dictating such preclusion, Section 1331 and Section 2201 each confer jurisdiction on this Court over the claims made in the Complaint. See Free Enterprise Fund v. Pub. Co. Accounting Oversight Bd., ––– U.S. ––––, 130 S.Ct. 3138, 3150, 177 L.Ed.2d 706 (2010)(“ Free Enterprise ”); Califano v. Sanders, 430 U.S. 99, 104–07, 97 S.Ct. 980, 51 L.Ed.2d 192 (1977).

Second, the SEC argues that Gupta's claims are barred by the doctrine of sovereign immunity. See SEC Mem. at 9–12. “The United States, as sovereign, is immune from suit save as it consents to be sued.” United States v. Sherwood, 312 U.S. 584, 586, 61 S.Ct. 767, 85 L.Ed. 1058 (1941). An agency may be sued only when there has been an express Congressional waiver of sovereign immunity, and then only in the specific manner that Congress has provided. United States v. Dalm, 494 U.S. 596, 608, 110 S.Ct. 1361, 108 L.Ed.2d 548 (1990). However, the SEC is subject to Section 702 of the Administrative Procedure Act (“APA”), which provides:

A person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review...